Economic Consequences of Auditor Reputation Loss: Evidence from the Audit Inspection Scandal

63 Pages Posted: 2 Nov 2020 Last revised: 3 May 2021

See all articles by Francine McKenna

Francine McKenna

American University - Kogod School of Business

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Amy Sheneman

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business

Date Written: October 19, 2020

Abstract

This paper examines the 2017 audit inspection scandal involving KPMG — one of the few
breaches of “tone at the top” at a Big 4 audit firm — to study whether and how the scandal affects
KPMG and its clients. From the federal court trial related to the scandal, we construct a novel data
set of KPMG client firms whose identities were revealed (i.e., transcript firms). Consistent with a
pecking order response, the transcript firms are associated with a reduction in non-audit fees
beginning in 2017 and an increased likelihood of turnover in 2018 and 2019. We find no evidence
of a change in audit fees for KPMG clients. Additional analyses show an increased incidence of
restatements for non-transcript clients and a decline in the quality of loan loss provisions for
transcript clients. Overall, our results suggest the audit inspection scandal imposed costs on KPMG
and its PCAOB-inspected clients.

Keywords: KPMG scandal, auditor reputation, auditor turnover, non-audit fees

JEL Classification: G14, G38, K22, M41, M42, M48

Suggested Citation

McKenna, Francine and Pevzner, Mikhail and Sheneman, Amy and Zach, Tzachi, Economic Consequences of Auditor Reputation Loss: Evidence from the Audit Inspection Scandal (October 19, 2020). Available at SSRN: https://ssrn.com/abstract=3715005 or http://dx.doi.org/10.2139/ssrn.3715005

Francine McKenna

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
3125234188 (Phone)
20015 (Fax)

HOME PAGE: http://https://www.american.edu/kogod/faculty/mckenna.cfm

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

Amy Sheneman (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

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